DEALBOOK ONLINE; DEAL PROFESSOR: CURIOUS DECISION

By STEVEN M. DAVIDOFF

Published: November 30, 2010

The Delaware Supreme Court's opinion in favor of Airgas in its battle with Air Products and Chemicals is notable for what it does not say or do. The court finds that Delaware's staggered board statute is ambiguous; so the court looks to see what Airgas's certificate of incorporation states. The court then finds that the certificate is also ambiguous.

This is where the Supreme Court opinion begins to differ from most Delaware decisions. In other cases on this issue, Delaware courts would typically follow the practice used by Chancellor William B. Chandler III in his lower court opinion: interpret the ambiguity against the company and in favor of the shareholder's because of Delaware's preference for empowering shareholders in their voting decisions.

In October, the Delaware Chancery Court ruled that a new corporate bylaw moving up the Airgas annual meeting to January was valid under Delaware law, thereby giving Air Products a way around Airgas's staggered board as it pushes for a takeover.

The Delaware Supreme Court, in its short opinion reversing that ruling last week, takes a different route. The court jumps over the case law concerning the stockholder franchise and instead holds that in these situations the ambiguity should be settled by looking to outside sources. The court does not state why it follows this path.

The outside sources the Delaware Supreme Court then looks to are thin. The court examines the Public Company Organizational Documents: Model Forms and Commentary and a 50-year-old opinion that did not address the exact issue. The court presumably would have also looked to academic literature on the subject, but the authors of one of the primary studies on staggered boards had a few weeks before issued their own statement that they had never thought about or looked at the issue.

The court ignored any countervailing evidence like Airgas's apparent willingness to move its own meeting date up three months and the bylaws. The court also cites the fact that many but not all companies with staggered boards state that board members have three-year terms. But the justices do not state anything about the fact that other companies do not and that many companies regularly move their meeting dates. The truth is that none of the sources addressed this exact issue before because no one had realized the problem.

I think that the decision is a disappointment. (Full disclosure: I had predicted a different outcome, but my disappointment is for other reasons.)

Given the weak legal arguments in support of Airgas, I believe this was a decision not based on the law but was effectively a political statement on the board's primacy in takeover decisions.

Hints that this was a political decision arise from the posture of the case. The judges took about three weeks to issue an opinion and only did so after a judge sitting by designation stepped down so that Justice Jack B. Jacobs could be part of the decision-making. Justice Jacobs was in a car accident on the way to the initial oral argument (he's fine thankfully) and the resigning judge was sitting by designation on an emergency basis.

The maneuvering may have meant that there was a dissent or disagreement over the opinion and the judges wanted to come out on a unanimous basis if they were going to take the rare step of overruling Chancellor Chandler. Hints that the judges were uncomfortable with this decision come from who wrote it: Justice Henry duPont Ridgely. You would have thought that either Chief Justice Myron T. Steele or Justice Jacobs would have written this opinion. After all, they are the two judges who sat on the Chancery Court and this was a notable opinion on corporate law.

You have to hand it to Airgas and Ted Mirvis at Wachtell, Lipton, Rosen & Katz for making this case about the effect of the staggered board and raising horror stories about the consequences of an adverse decision.

In truth, this was never that important a case for this issue and there were easy workarounds. And in truth, this is why the decision will likely have little import. The case is at best a sign of how the Delaware Supreme Court justices feel about protecting the board in takeover decisions. But it is hard to gauge even this impact. It might sustain arguments for federalism of the staggered board as was tried last year by Congress. For some, it also is a disappointment for the principle of judicial certainty -- that is, judges should follow precedent so as to provide future litigants certainty. But then again and more likely, in six months it will be forgotten -- something the Supreme Court judges may be counting on.

It is hard to be a Monday morning quarterback on this and say that Air Products and its lawyers at Cravath, Swaine & Moore should not have been so aggressive and perhaps only moved the meeting forward by three or four months instead. But Air Products likely did not want to wait that long. In addition, moving the meeting forward only part way would have been an admission that there was some weakness in its legal argument.